A city's 'happiness level is a number that measures your resident's "happiness" in proportion to the number of businesses you have in your city.
When you have more residents, you'll need to buy more businesses to keep them happy. The goal is to have the happiness number higher than the population number. For example, if you have 500 residents, a happiness level of 1500 will make them very happy. Businesses that cost more tend to raise the level more.
The happiness level is shown by both a number and a smiley face that ranges from very sad, sad, happy, and very happy.
If the population is higher than than the happiness number, the cizitens will get sad.